The depth of the economic crisis in Spain has been such that not even debt-collection agencies, which had expected a lot from growing defaults, have managed to escape its tentacles. "The sector is in a very bad way," says Melania Sebastián, general manager of Gesif. "Defaults have taken off but people are in no state to pay. We're working more and earning less."
That was not what the sector had hoped for. Industry players at the end of 2008 expected the business to take off because of rampant default rates. In a report released in the same year on debt collection, consultant DBK pointed to the strong potential of the market in the "context of the deterioration in economic activity and the increase in the number of bad debts."
Prior to the crisis, the sector was growing rapidly. Between 2005 and 2008 turnover almost doubled from 265 million euros to 465 million. Paradoxically, after the explosion in non-performing debt, the situation went awry and the sector came to a halt. In 2011, debt collectors' revenue in Spain amounted to only 480 million euros, below the figure of 505 million a year earlier. "Things started to get worse from 2009, two years after the crisis started to set in, and haven't improved since," explains José María de Gregorio, manager of Angeco, the association that groups together 49 large debt-collection businesses.
With so many people out of work, it's very difficult to collect debts"
The people most surprised by this development are those in the sector itself. This had not occurred in previous crises, perhaps because none of them was as deep as the current one. In fact, until the slowdown became evident, new players were busy entering the market. "Many moved into the sector based on the conviction that the surge in defaults would generate business for them," De Gregorio says.
Established firms such as Gescobro, Gesif and Geslico of the Lico group, set up in the last two decades of the 20th century, were joined by multinationals such as Sweden's Intrum, BNP Paribas' Effico, the German outfits Otto Group and GFKL through Spanish units EOS Ibérica and Multigestión, and Norwegian firms Aktiv Kapital and Lindorff. These focus on buying up portfolios of defaults.
Other newcomers included consultant Agrupalia and call centers such as Atento, which was sold last year by Telefónica to US private equity firm Bain Capital. Atento set up a debt-collection division in 2009.
So why were the sector's forecasts misguided? Quite simply, the crisis has been so persistent that defaulters simply do not have any money to settle longstanding bills even if they want to. "When there are so many people out of work and with so many immigrants going home, it's very difficult to collect debts," says Luis Salvaterra, the general manager of Intrum.
Then comes the problem that in many cases debts have been left unpaid for a long time. "Sharp restrictions on credit have halted the creation of new defaults, which are the easiest to collect," a source at Atento says. According to DBK, while in 2008, 18.8 percent of debts were recovered, three years later that ratio had fallen to 12.2 percent.
With a few ecpections, a large part of the sector is having a hard time.
Proof that too many defaults is not a good thing is clearly seen at Intrum, whose revenues last year rose 2.6 percent due to an increase of 12 percent in the north of Europe; while turnover in Western Europe, which includes southern countries such as Spain, fell 8 percent.
According to DBK bad debt more than doubled from 63.083 billion euros in 2008 to 135.749 billion in 2011, while defaults under management by debt collectors more than tripled from around 26 billion in 2007 to 81 billion in 2011. Only 9.9 billion euros of this debt was recovered in 2011, slightly more than the 9 billion euros collected in 2008.
It is no surprise to hear players in the sector saying they work more and fork out more on telecommunications, technology and judicial proceedings to earn less. According to Angeco, the 49 companies in the association handled 28 million cases in 2011, 100,000 a day or 47,000 for each of its 6,000 workers. "All this effort with so little success," laments Gesif's Sebastián. "Margins have fallen to less than a half." That also reflects greater competition, with over 800 companies vying with each other with very aggressive price-discounting.
Things are getting increasingly difficult for many companies. "There are companies that made big investments in infrastructure at the request of customers such as banks, and now they can't afford these fixed costs," says Angeco's De Gregorio. Some have managed to offset partly or fully for the deterioration by taking on new types of clients or by buying portfolios of defaults. "We could have dropped a lot more if it weren't for the fact we're providing services to sectors that didn't use us before, such as insurance companies," Intrum's Salvaterra says. Traditional clients have been banks, telecommunications companies and utilities.
The purchase of portfolios, a business normally associated more with investment funds, was a dormant segment of the business between 2006 and 2011. Now it has picked up again as a result of the restructuring of the banking sector. The company buys the portfolio at 5-6 percent of its face value and aims to recover over 6 percent of the unpaid debt.
Portfolio purchasing has picked up as the banking sector is restructured
"Last year, portfolios with a nominal value of 10 billion euros were acquired for which 600 million was paid," Salvaterra says. Aktiv Kapital last year bought two portfolios from nationalized bank Bankia with a nominal value of 926 million and Lindorff another from Banco Popular with a nominal value of 1.430 billion euros.
With a few exceptions, a large part of the sector is having a hard time. Gesif, for example, had 350 workers in 2009 but now has only 250. "There are a lot of companies making losses now," Gesif's Sebastián says. A number of companies have actually closed, such as Effico of the BNP Paribas group. Word has it that Geslico may be restructuring its business, while other firms in the sector are being sold. Santander last year transferred its debt-management unit Reintegra to Lindorff as part of the sale of two portfolios of bad debts. This year, Unitas was sold to Gescobro, while CTI's operations were acquired by Intrum.
Strange as it may seem, at the moment the sector is praying for an improvement in the economic situation and for credit to start flowing in order to create a new generation of bad debtors - the kind who do eventually cough up.